Background of the Case
Alabama sued 73 pharmaceutical manufacturers, including AstraZenaca, Glaxosmithkline, and Novartis in 2005, alleging the drug manufacturers fraudulently caused the state to over-reimburse prescription drug providers in its Medicaid program because the manufacturers did not include undisclosed discounts rebates and other incentives in the reported pricing data the state used to calculate its reimbursement formulas.

States do not have to participate in the Medicaid program, but states that do participate must comply with federal regulations governing reimbursement standards.

At trial, the AstraZeneca jury returned a verdict against the manufacturer for $215 million in compensatory and punitive damages. The Novartis/GSK jury awarded the state of Alabama more than $113 million in combined compensatory damages.

The three companies prevailed on appeal in the case. In an 8–1 decision, the Alabama Supreme Court concluded that the state had not proven its claims of fraudulent misrepresentation or suppression against the companies because there was insufficient evidence that the state relied upon the manufacturers’ published average cost or wholesale prices as actual prices for the prescription drugs.

On January 22, 2010, the court denied the Alabama attorney general’s request to reconsider the decision.

“The Alabama Supreme Court's rejection of the [attorney general’s] request for reconsideration further reinforces an influential precedent for these types of cases pending around the country," observes Daniel S. Wittenberg, Denver, cochair of the ABA Section of Litigation Products Liability Committee and Litigation News associate editor.

Nate Cade, Milwaukee, cochair of the Section’s Products Liability Committee, views the decision as “the end of regulation by litigation, which has become all too common in other areas such as lead paint, firearms, and carbon dioxide emissions.”

The Pricing List
For the drugs at issue in the action, the Alabama Medicaid Agency (AMA) had used a methodology adopted with the approval of the Centers for Medicare and Medicare Services, whereby reimbursement was not to exceed the lesser of: (1) the estimated acquisition cost of the drug plus reasonable dispensing fees; or (2) the provider’s usual and customary charges to the general public.

Recounting how Alabama developed its reimbursement formulas, the court opinion notes that typically, pharmaceutical companies report on pricing by referring to either the “wholesale acquisition cost” (WAC) or an “average wholesale price” (AWP). Neither WAC nor AWP reflect actual prices paid for drugs because neither figure takes into account discounts, incentives, premiums, or special offers that may reduce the actual price paid for the drug at the point of sale.

Until 1985, AMA reimbursed providers at a rate of 100 percent of AWP, according to the evidence at trial, the court opinion notes. However, after the federal agency threatened to withdraw federal financial participation from the Alabama Medicaid program, Alabama changed its reimbursement methodology to calculate the estimated acquisition cost based on a discounted AWP, the opinion says. From 1987 until the time of the appeal, with few exceptions, the AMA reimbursement used a formula of AWP – 10.2 percent or WAC + 9.2 percent, the opinion says.

In the action, Alabama argued that manufacturers knew that “the false and deceptive inflation of AWP and WAC caused the AMA to pay” excessive amounts for these drugs” and that the AMA “reasonably relied on the false pricing data in setting prescription drug reimbursement rates and making payment based on said rates.”

However, in the decision on appeal, the state supreme court focused on whether the state had presented substantial evidence of its reasonable reliance on the published WAC and AWP prices for the pharmaceutical manufacturer’s prescription drugs.

The high court rejected the state’s assertion of a “broad, systemic fraud” perpetrated by pharmaceutical manufacturers because the state’s own pricing methodology, which discounted AWP, demonstrated that the state was aware that the manufacturers’ published drug prices were list prices that excluded discounts and, consequently, did not represent actual discounted prices for the listed drugs.

The Alabama Supreme Court further found that “the AMA’s understanding of the meaning of WAC derived, not from the manufacturers’ misrepresentations or suppressions, but from its own studies and surveys.”

Based on internal correspondence dating back to 1985, the court observed that the AMA had actual knowledge that the published AWPs were not net prices and could not therefore have reasonably relied upon published pricing to its detriment.

Cade says he “hopes that other states will take notice” before pursuing similar claims and understand the need to present evidence showing that AWP is anything other than a list price, not an actual price.